Credit Reports and Scores

What’s the Difference?

The two key terms to understand when discussing credit are credit reports and credit scores. Oftentimes, people confuse the two terms, but there are important differences between a credit report and credit score.

Credit Reports

A credit report is a detailed listing of all your debt, both past and present. It shows all the credit cards and loans in your name. It also shows how much debt you owe to each creditor and how consistent you are at paying what you owe.

Requesting Your Credit Report
Requesting a credit report is easy and FREE! You can request it online, by phone, or by mail.

Website: www.AnnualCreditReport.com
Phone: 1-877-322-8228
Address: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281

Federal law entitles you to three free credit report per year (one from each of the three major credit reporting agencies: Experian, Equifax, and TransUnion.

Helpful tip: Avoid requesting all three of your credit reports at the same time! Spreading them out throughout the year provides you with an extra layer of protection against fraud and mistakes. It might be helpful to add calendar reminders, so you don’t forget when it’s time to check your report with each of the three credit reporting agencies.

Reading Your Credit Report
Credit reports have a LOT of information on them. If you’ve never read one before, one glance at them can leave you feeling more than a little intimidated. Fortunately, they’re not as scary as you might think.

There are several good websites that breakdown credit reports line-by-line to teach you how to read one and how to look for any signs of trouble, such as identity theft. The sample credit report on CreditCards.com provides an easy to understand format, but there are plenty of options out there.

Print our Credit Report worksheet.

Credit Scores

Think of your credit score as a measure of your financial trustworthiness, because that’s how it is used. Banks, landlords, and insurance companies all use credit scores to decide if you can be trusted with money. Imagine your friend Bob begs you for some money. Out of the goodness of your heart, you give him the loan. He’s borrowing it, right? But months go by, and Bob doesn’t pay you back even though he said he would. You probably won’t loan him money again. You may even tell other friends that Bob can’t be trusted with money. This is what happens when you fail to pay your loans or bills. The people you promised to pay back report you to credit reporting agencies, and suddenly you have a bad reputation, otherwise known as a low credit score. By paying your bills on time and keeping your debt low, you can earn a high credit score.

Calculating Your Credit Score
Let’s take a look at how credit scores are calculated. While each credit reporting agency has their own unique formula, they follow this basic pattern.

The biggest factor is your payment history.  It accounts for 35% of your score. Making payments on time – for your credit cards, mortgage, utilities, and so on – is the best way to improve and maintain good credit.

The next major contributor in calculating your credit score is how much you owe. This makes up 30% of your score. Not only do you need to worry about how much debt you have, but how much of your credit you are using. The concept is called “credit utilization.” Using less of your available credit will improve your score. Bottom line: don’t max out your credit cards!

15% of your credit score comes from your credit history.  Have you made mistakes in the past? You can’t erase them, but you can work to avoid repeating them. Your credit history also takes into account how long you’ve had certain types of accounts and when those accounts were last active.

The types of credit in use make up 10% of your number. The number and types of credit accounts are factored into your score. Student loans, mortgages, credit cards, and so on.

Another 10% of your score comes from inquiries and new credit.  Avoiding the temptation to open new lines of credit even when a cashier tells you that you can save some money on a purchase by doing so is a great action to take to help improve your credit score. The inquiry could damage your credit, and you’ll end up with more debt.

Requesting Your Credit Score
Requesting your credit score can be tricky. That’s because most providers require you to PAY for access to your score. Be sure to research the provider ahead of time to ensure the security of your personal information, the cost involved, and if the provider will issue a true score or an estimate. Some credit card companies, banks, and loan issuers have recently begun giving free credit scores and estimates to customers, so you may wish to check with yours.

Understanding Your Credit Score
There is no one federal standard for calculating credit scores. Credit scores are a BUSINESS, and FICO is the biggest. Credit bureaus are privately held, for-profit companies that are regulated by the Federal Trade Commission. The range system below is the one used by FICO. If your score comes from another company, the range could be different.

Under 580 – This is a poor FICO score. A score of less than 580 means you may have filed for bankruptcy in the past or missed a LOT of payments. It could also mean that you’re young and have no credit history yet. A bad credit score means you may have trouble getting approved for loans and credit cards.
580-669 – This is a fair credit score. This score is below the average score of U.S. consumers, though many lenders will approve loans with this score.
670 to 739 – This is an average/good credit score. If you fall into this range, it’s probably because you have too much “bad” debt. Maybe you carry over debt on credit cards from one month to the next, or you have maxed out a card or two. Late payments can lower your score as well. If you have a score in this range, companies are less likely to trust you, and they may charge you higher interest rates.
740-799 – If you have a score in this range, you’re in great shape! This is considered a very good credit score. You’ll save money, because people with higher scores are likely to get approved for new credit, and they can also expect lower interest rates.
Over 799 – This range is considered exceptional. It’s hard for most of us to achieve, and it also comes with risks. That’s because people who fall into this category usually have a lot of credit. They’re good at managing it, but if they fall on hard times, they can get into trouble fast.

Improving Your Credit Score
To improve your credit score, you need to conquer bad habits. No more late payments! As we already discussed, payment history accounts for 35% of your credit score. Paying your bills on time is the best way to improve your score. And when it comes to paying credit card bills, try to pay MORE than you owe each month. This will equal fewer payments in the long run, which will in turn equal less interest paid.

Print our Credit Report worksheet.

Helpful Resources

Basics of Credit
Credit Calculators
Debt Management